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Japan’s efforts to turn tide of population loss not paying off

Despite Abenomics Japan is now in its fourth recession since 2008

Fri, Nov 21, 2014, 01:25

James Saft

Japan’s prime minister Shinzo Abe. As always with Japan, given its very large public debt, time may not be an unlimited resource. Photograph: Shizuo Kambayashi/AP

Japan’s attempts, through Abenomics, to beat back against the tide of demographics may be proving futile.

Japan has lapsed into its fourth recession since 2008, with its economy contracting at a 1.6 per cent annual clip in the third quarter, frustrating hopes that the Abenomics cocktail of fiscal and economic stimulus topped up with deregulation would be enough.

While asset markets have surged, and inflation risen, though less than desired, wages have not kept pace and a rise in a consumer tax in April derailed economic momentum.

The talk now is of more of the same: not just more stimulus from the Bank of Japan, but potentially more government spending, a delay to another planned tax increase and a snap election to allow prime minister Shinzo Abe the chance to win a reaffirmed mandate.

With the exception of delaying the planned tax increase, now slated for October 2015, this amounts to more of the same, begging the question of why steps taken thus far have not worked.

“What if the Japanese economy simply can’t sustain the desired inflation any more? What if the historical epoch during which that expectation was feasible is now over?” writes Edward Hugh, an economist with a particular focus on demographics.

“Obviously it isn’t difficult to generate a certain amount of consumer price inflation if you raise consumer taxes, and again you can also get it if you devalue your currency, and keep doing so. But, as we are now seeing, you do need to keep repeating the moves. There doesn’t seem an underlying mechanism there waiting to be kick-started.”

The theory underlying Abenomics holds that a fall in the value of the yen will stimulate investment and help, along with other measures, to end the deflationary mindset in which deferring consumption or investment seems wise. That brings on a self-sustaining recovery, one which won’t just generate inflation, but the growth needed to help Japan outpace its debt.

But Hugh suggests Japan’s particular set of issues, characterised by a shrinking and rapidly aging population, may make this formula less effective.

Instead, we might want to consider the work of depression-era economist Alvin Hansen, an early identifier of the “secular stagnation” theme recently expanded upon by Lawrence Summers. In Hansen’s views, firms need to see both a strong outlook for profits and for market growth in order to ramp up investment, rather than simply cheap funding costs.

Take the situation facing a Japanese corporation considering making an investment. It will be fully aware that its domestic market is not only far from healthy, given the shrinking purchasing power of households, but also that the country itself is in the midst of a long-running period of population loss and demographic-driven consumption changes.

While surely a cheaper yen makes investment attractive - after all goods made in Japan will be more competitive internationally – that situation may not be permanent. There is a reason that competitive currency devaluation is called a “beggar-thy-neighbour” strategy, and that is because it is a zero-sum operation.

Japanese corporations have seen currency moves before and are well aware that they are not permanent. China, Japan’s huge and less than friendly neighbour, need only decide, and the yen losses against the dollar could be swamped by yuan weakening.

So perhaps it is not entirely surprising that a self-sustaining recovery in Japan has failed to materialise.

There is only so much which either monetary or fiscal policy would seem to be able to do in these circumstances. The Bank of Japan, after all, can print yen, but not Japanese, much less Japanese willing to consume with abandon.

Despite the fact that the Bank of Japan’s’s most recent avowal of doing more was won with only a 5-4 majority vote among central bank officials, the most likely bet is that both the central bank and Abe stick to their guns.

And after all, it is possible that the problem is simply one of scale, and that a big enough bazooka will eventually be found.

Almost more to the point, there isn’t a well enunciated alternative. Surely structural reforms can help, particularly Japanese efforts to increase workforce participation. These things take time, however.

As always with Japan, given its very large public debt, time may not be an unlimited resource. At some point the realization may dawn that Japan can’t raise taxes to service its debts and grow.

Expect more stimulus, more liquidity and more yen weakness. – (Reuters)

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